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RADIAN GROUP INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The disclosures in this quarterly report are complementary to those made in our 2021 Form 10-K and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report, as well as our audited financial statements, notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K. The following analysis of our financial condition and results of operations for the three and nine months endedSeptember 30, 2022 , provides information that evaluates our financial condition as ofSeptember 30, 2022 , compared withDecember 31, 2021 , and our results of operations for the three and nine months endedSeptember 30, 2022 , compared to the same periods last year. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements-Safe Harbor Provisions" herein, and "Item 1A. Risk Factors" in our 2021 Form 10-K for a discussion of those risks and uncertainties that have the potential to adversely affect our business, financial condition, results of operations, cash flows or prospects. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. See "Overview" below and Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Index to Item 2 Item Page Overview 40 Key Factors Affecting Our Results 43 Mortgage Insurance Portfolio 43 Results of Operations-Consolidated 46 Results of Operations-Mortgage 51 Results of Operations-homegenius 57 Results of Operations-All Other 60 Liquidity and Capital Resources 61 Critical Accounting Estimates 65
Overview
We are a diversified mortgage and real estate business with two reportable
business segments-Mortgage and homegenius.
Our Mortgage segment aggregates, manages and distributesU.S. mortgage credit risk for the benefit of mortgage lending institutions and mortgage credit investors, principally through private mortgage insurance on residential first-lien mortgage loans, and also provides contract underwriting and other credit risk management solutions to our customers. Our homegenius segment offers an array of title, real estate and technology products and services to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents.
Current Operating Environment
As a seller of mortgage credit protection and other mortgage and credit risk
management solutions and real estate products and services, our business results
are subject to macroeconomic conditions and other events that impact the
housing, housing finance and related real estate markets, the credit performance
of our mortgage insurance portfolio and our future business opportunities, as
well as seasonal fluctuations that specifically affect the mortgage origination
environment. The performance of our Mortgage business is particularly influenced
by housing prices, inflationary pressures, interest rate changes, unemployment
levels, the availability of credit, national and regional economic conditions
and other events that impact housing and real estate markets generally, mortgage
originations and the ability of borrowers to remain current on their mortgages,
most of which are beyond our control.
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The U.S. economy is currently experiencing a high rate of inflation, with annual
inflation reaching a 40-year high in September 2022 , as well as slower economic
growth, declining home prices and the risk of a recession and higher
unemployment rates. Recent actions taken by the U.S. Federal Reserve to increase
interest rates in response to the inflationary trends that started in 2021 have
resulted in a sharp and significant increase in mortgage interest rates during
the first nine months of 2022, with mortgage rates more than doubling to over 7%
at the end of October 2022 . The U.S. Federal Reserve raised rates further in the
fourth quarter of 2022 and has signaled that it expects to continue to increase
rates in future periods. These economic conditions have negatively impacted the
U.S. housing market, broadly reducing refinance activity and new purchase
transactions and resulting in decreasing home prices in recent months in many
markets. As further discussed below, we expect that the current economic
environment will continue to negatively impact certain aspects of our results,
including lower NIW, lower homegenius revenues, higher mortgage insurance
defaults and lower investment fair values. At the same time, we also expect to
benefit from the higher interest rate environment through higher Persistency
Rates that will favorably impact our IIF, as well as through the recognition of
higher net investment income, as further discussed below.
In light of the current economic and operating environments, throughout the year
we have taken steps to align our workforce to the current and expected needs of
the business. As such, we expect to end the year with between approximately 20%
to 25% fewer employees than we had at year end 2021.
The cooling effect of current economic conditions on U.S. housing markets
throughout 2022 has resulted in a smaller insurable market compared to 2021,
reducing our NIW. We wrote NIW of $55.1 billion in the first nine months of
2022, a decrease of 19.2% compared to our NIW in the first nine months of 2021.
We expect these conditions to continue to negatively impact our NIW volumes in
future periods. Longer-term, however, we continue to believe that the housing
market fundamentals and outlook remain favorable, including demographics
supporting growth in the population of first-time homebuyers and a constrained
supply of homes available for sale. While the recent increases in mortgage
interest rates have significantly reduced refinance demand, they have also
resulted in a decrease in policy cancellations, which has increased our
Persistency Rate, and in turn contributed to growth in our IIF. See "Mortgage
Insurance Portfolio" for additional details on our NIW and IIF.
The same inflationary pressures and rising interest rate environment that are
impacting mortgage refinance demand and our NIW are also impacting our
homegenius business, including a significant decrease in our title revenues
beginning in the second quarter of 2022, due to the rapid decline in
industrywide refinance volumes. The current macroeconomic trends, and the
corresponding softening in demand for home sales and mortgage refinancings, are
expected to also impact the market demand for our new proprietary digital real
estate products and services, which in some cases, have been delayed by longer
than anticipated launch timelines.
The recent sharp increases in interest rates also materially affected the fair
value of our investment portfolio in the nine months ended September 30, 2022 ,
resulting in significant unrealized losses on investments. Given our intent and
ability as of September 30, 2022 , to hold these securities until recovery of
their amortized cost basis, we do not expect to realize a loss on any of our
investments in an unrealized loss position. The decrease in the fair value of
our investments due to higher market interest rates negatively affected our net
income and stockholders' equity during the three and nine months ended September
30, 2022 . Conversely, this higher interest rate environment resulted in the
recognition of higher net investment income in the second and third quarters of
2022, which is expected to continue in future periods. See Note 6 of Notes to
Unaudited Condensed Consolidated Financial Statements for additional information
about our investments.
The onset of the COVID-19 pandemic resulted in a significant increase in
unemployment which had a negative impact on the economy and, as a result, we
experienced a material increase in new defaults in 2020, substantially all of
which related to defaults of loans subject to mortgage forbearance programs
implemented in response to the COVID-19 pandemic. Beginning in the second
quarter of 2020, the increase in the number of new mortgage defaults resulting
from the COVID-19 pandemic had a negative effect on our results of operations
and our reserve for losses. However, subsequent trends in Cures have been more
favorable than original expectations, resulting in favorable loss reserve
development on prior period defaults in 2021 and in the three and nine months
ended September 30, 2022 . See Note 11 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional information on our reserve for
losses.
As noted above, following the start of the pandemic, we experienced a material
increase in new defaults and our primary default rate increased sharply to 6.5%
at June 30, 2020 . Since then, favorable trends in the number of new defaults and
Cures have led to a decline in our default inventory and default rate, resulting
in a primary default rate of 2.1% at September 30, 2022 . However, deteriorating
economic conditions, including declining home prices and the risk of a recession
and higher unemployment rates, have increased the likelihood that we will
experience higher levels of new default activity and lower levels of Cures in
our mortgage insurance portfolio. The number, timing and duration of new
defaults and, in turn, the number of defaults that ultimately result in claims
will depend on a variety of factors, including the overall economic environment
and its effect on the number and timing of Cures and the net impact on IIF from
our Persistency Rate and future NIW. See "Item 1A. Risk Factors" in our 2021
Form 10-K for additional discussion of these factors and other risks and
uncertainties.
Despite risks and uncertainties, we believe that the steps we have taken in
recent years, including by improving our capital and liquidity positions,
enhancing our financial flexibility, implementing greater risk-based granularity
into our pricing methodologies and increasing our use of risk distribution
strategies to lower the risk profile and financial volatility of our
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mortgage insurance portfolio, has helped position the Company to better
withstand the negative effects from the macroeconomic stresses discussed above,
including those resulting from the high rate of inflation and rising interest
rates, as well as geopolitical risks resulting from the Russia -Ukraine conflict
and the other risks described in "Item 1A. Risk Factors" in our 2021 Form 10-K.
In particular, we believe that the range of risk distribution transactions and
strategies that Radian and other private mortgage insurance participants have
engaged in have helped increase the financial strength and flexibility of the
private mortgage insurance industry by mitigating credit risk and financial
volatility through varying economic cycles. As of September 30, 2022 , 68% of our
primary RIF is subject to a form of risk distribution and our estimated
reinsurance recoverables related to our mortgage insurance portfolio were $29.7
million . Our use of risk distribution structures has reduced our required
capital and enhanced our projected return on capital, and we expect these
structures to provide a level of credit protection in periods of economic
stress.
Legislative and Regulatory Developments
We are subject to comprehensive regulation by both federal and state regulatory authorities. For a description of significant state and federal regulations and other requirements of the GSEs that are applicable to our businesses, as well as legislative and regulatory developments affecting the housing finance industry, see "Item 1. Business-Regulation" in our 2021 Form 10-K. Except as discussed below, there were no significant regulatory developments impacting our businesses from those discussed in our 2021 Form 10-K. For many years, theNational Association of Insurance Commissioners (the "NAIC") has been considering changes to the Model Act and has been reviewing the minimum capital and surplus requirements for mortgage insurers. InOctober 2022 , the NAIC publicly released a new exposure draft of a revised Model Act (the "2022 Exposure Draft") for comment. With respect to minimum capital and surplus requirements for mortgage insurers, the 2022 Exposure Draft largely preserves the same requirements as exist in the current Model Act. In addition, in 2021, the NAIC developed a new, legally non-binding capital monitoring framework that regulators could use as an alternative for assessing the capital adequacy of a mortgage insurer and added a new mortgage guaranty supplemental filing for companies to annually report related information. This monitoring framework, which is separate from the Model Act, is intended to be reactive to, among other things, changes in the economic and housing environment, including changes in home prices and incomes. The outcome of the new Model Act process remains subject to change, and therefore, the potential impact on the Company cannot be determined and, among other things, will depend on whether the NAIC adopts final changes to the Model Act and which states, if any, ultimately adopt the new Model Act. In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs' eligibility requirements, or PMIERs. OnJuly 29, 2022 , the GSEs issued guidance supplementing and modifying certain operational provisions of the PMIERs effective as ofJune 30, 2022 . The new guidance applies to all private mortgage insurers and among other items, specifically amends certain provisions of the PMIERs relating to corporate governance, the foreclosure bidding process and certain calculations included in each mortgage insurer's operational scorecard. Radian Guaranty expects to be able to comply with the new requirements. The new guidance does not impact or change the PMIERs financial requirements. InJune 2022 , FHFA announced the release of the GSEs' Equitable Housing Finance Plans, providing a framework for planned initiatives to address access to homeownership for minority and underserved communities. The GSEs are expected to update these plans annually. The plans released in June include a particular focus on Special Purpose Credit Programs ("SPCPs") and note that these programs could consider modifications to mortgage insurance requirements. While both Fannie Mae and Freddie Mac's plans note this potential change as part of these programs, details on any future changes remain uncertain. Both GSEs expect to launch SPCPs by the end of 2022. The plans also include expected activity to address credit and alternative data in underwriting, valuations and appraisals, and title insurance, among others. In furtherance of the FHFA's focus on promoting sustainable and equitable access to affordable housing, and as part of an ongoing pricing review of the GSEs' guarantee fees, inOctober 2022 , the FHFA announced, among other pricing changes, an elimination of GSE loan-level pricing adjustments (upfront fees) for some first-time and low-and moderate-income borrowers, including first-time homebuyers at or below 100 percent of area median income ("AMI") in most ofthe United States and below 120 percent of AMI in high-cost areas. FHFA is working with the GSEs to finalize a timeline for implementing these changes, which we expect may have a modest favorable impact on the private mortgage insurance industry's share of the insurable, low down payment market. In addition, inOctober 2022 , FHFA announced that the GSEs will replace their use of Classic FICO credit scores with FICO 10T and VantageScore 4.0 credit scores, which are intended to improve accuracy by capturing new payment histories for borrowers when available, such as rent, utilities, and telecom payments. The GSEs will require both of the new credit scores, along with credit reports from two, rather than three, of the credit reporting agencies. The implementation timeline for the transition to the new credit scores is expected to be a multi-year effort and the timeline for ultimate implementation is uncertain. 42
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Key Factors Affecting Our Results
The key factors affecting our results are discussed in our 2021 Form 10-K. There
have been no material changes to these key factors.
Mortgage Insurance Portfolio
IIF by origination vintage (1)
[[Image Removed: rdn-20220930_g2.jpg]]
Insurance in Force as of:
Vintage written in: September 30, December 31, 2021 September 30,
($ in billions) 2022 2021
¢ 2022 $53.5 20.6 % $- - % $- - %
¢ 2021 79.5 30.7 87.4 35.5 66.1 27.4
¢ 2020 61.3 23.7 74.3 30.2 80.1 33.1
¢ 2019 18.7 7.2 24.0 9.8 27.7 11.5
¢ 2018 9.5 3.6 12.4 5.0 14.2 5.9
¢ 2017 8.7 3.4 11.5 4.7 13.1 5.4
¢ 2009 - 2016 18.4 7.1 25.0 10.2 28.2 11.7
¢ 2008 & Prior (2) 9.5 3.7 11.4 4.6 12.2 5.0
Total $259.1 100.0 % $246.0 100.0 % $241.6 100.0 %
(1)Policy years represent the original policy years and have not been adjusted
to reflect subsequent refinancing activity under HARP.
(2)Includes loans that were subsequently refinanced under HARP.
New Insurance Written
We wrote$17.6 billion and$55.1 billion of primary new mortgage insurance in the three and nine months endedSeptember 30, 2022 , respectively, compared to$26.6 billion and$68.2 billion of NIW in the three and nine months endedSeptember 30, 2021 , respectively. As shown in the chart above, IIF increased to$259.1 billion atSeptember 30, 2022 , from$246.0 billion atDecember 31, 2021 , driven by a higher Persistency Rate and our NIW for the first nine months of 2022. Our NIW decreased by 33.7% and 19.2% for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021 due to reduced refinance originations and lower utilization of mortgage insurance, partially offset by an increase in our market share for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. According to industry estimates, total mortgage origination volume was lower for the three and nine months endedSeptember 30, 2022 , as compared to the comparable periods in 2021 due to a significant decline in refinance activity and a smaller decline in home purchases. Although it is difficult to project future volumes, recent market projections for 2022 estimate total mortgage originations of approximately$2.4 trillion , which would represent a decline in the total annual mortgage origination market of approximately 48% as compared to 2021, with a private mortgage insurance market of$380 billion to$420 billion . This outlook anticipates a 74% decrease in refinance originations in 2022 as well as a 12% decline in purchase originations driven by increases in interest rates and declining home sales volume. See "Item 1A. Risk Factors" in our 2021 Form 10-K for more information. The following table provides selected information as of and for the periods indicated related to our mortgage insurance NIW. For direct Single Premium Policies, NIW includes policies written on an individual basis (as each loan is originated) and on an aggregated basis (in which each individual loan in a group of loans is insured in a single transaction, typically after the loans have been originated). 43
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NIW
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 2022 2021 2022 2021
NIW $ 17,616 $ 26,558 $ 55,134 $ 68,243
Primary risk written $ 4,450 $ 6,781 $ 14,085 $ 16,511
Average coverage percentage 25.3 % 25.5 % 25.5 % 24.2 %
NIW by loan purpose
Purchases 98.4 % 89.8 % 95.6 % 76.8 %
Refinances 1.6 % 10.2 % 4.4 % 23.2 %
Total borrower-paid NIW 99.1 % 99.2 % 99.2 % 99.2 %
NIW by premium type
Direct Monthly and Other Recurring Premiums 95.5 % 93.8 % 95.1 % 92.5 %
Direct single premiums (1) 4.5 % 6.2 % 4.9 % 7.5 %
NIW by FICO Score (2)
>=740 63.3 % 56.0 % 59.9 % 60.2 %
680-739 28.5 % 34.9 % 32.3 % 33.3 %
620-679 8.2 % 9.1 % 7.8 % 6.5 %
NIW by LTV
95.01% and above 18.3 % 12.1 % 16.8 % 10.5 %
90.01% to 95.00% 37.1 % 46.7 % 39.7 % 40.2 %
85.01% to 90.00% 28.0 % 26.5 % 28.1 % 28.3 %
85.00% and below 16.6 % 14.7 % 15.4 % 21.0 %
(1)Borrower-paid Single Premium Policies were 4.3% and 4.7% of NIW for the three
and nine months ended September 30, 2022 , respectively, compared to 6.0% and
7.2% for the same periods in 2021, respectively.
(2)For loans with multiple borrowers, the percentage of NIW by FICO score
represents the lowest of the borrowers' FICO scores.
Insurance and Risk in Force
Our IIF is the primary driver of the future premiums that we expect to earn over time. IIF atSeptember 30, 2022 , increased 7.3% as compared to the same period last year, reflecting an 11.8% increase in Monthly Premium Policies in force partially offset by a 13.2% decline in Single Premium Policies in force. Single Premium Policy cancellations were the primary driver of the decrease in unearned premiums on our condensed consolidated balance sheet atSeptember 30, 2022 , as compared toDecember 31, 2021 . Historically, there is a close correlation between interest rates and Persistency Rates. Higher interest rate environments generally decrease refinancings, which decrease the cancellation rate of our insurance and positively affect our Persistency Rates. As shown in the table below, our 12-month Persistency Rate atSeptember 30, 2022 , increased as compared to the same period in 2021. The increase in our Persistency Rate atSeptember 30, 2022 , was primarily attributable to decreased refinance activity due to increases in mortgage interest rates, as compared to the same period in the prior year. As ofSeptember 30, 2022 , 1.9% of our IIF had a mortgage note interest rate greater than 6.0%. Excluding the 2022 vintage, only 0.9% of our IIF had a mortgage note interest rate greater than 6.0%. Given the recent increase in market mortgage interest rates, which, based on reported industry averages, now exceed that level, we would expect a continued positive impact on our Persistency Rates. Historical loan performance data indicates that credit scores and underwriting quality are key drivers of credit performance. Loan originations after 2008 have consisted primarily of high credit quality loans with significantly better credit performance than loans originated during 2008 and prior periods. However, the impact to our future losses remains uncertain due to risks associated with the macroeconomic environment. For additional information, under "Item 1A. Risk Factors" in our 44
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2021 Form 10-K, see "-The credit performance of our mortgage insurance portfolio
is impacted by macroeconomic conditions and specific events that affect the
ability of borrowers to pay their mortgages."
Throughout this report, unless otherwise noted, RIF is presented on a gross basis and includes the amount ceded under reinsurance. RIF and IIF for direct Single Premium Policies include policies written on an individual basis (as each loan is originated) and on an aggregated basis (in which each individual loan in a group of loans is insured in a single transaction, typically after the loans have been originated).
The following table provides selected information as of and for the periods
indicated related to mortgage insurance IIF and RIF.
IIF and RIF
December 31,
($ in millions) September 30, 2022 2021 September 30, 2021
Primary IIF $ 259,121 $ 245,972 $ 241,575
Primary RIF $ 65,288 $ 60,913 $ 59,421
Average coverage percentage 25.2 % 24.8 % 24.6 %
Persistency Rate (12 months ended) 75.9 % 64.3 % 60.8 %
Persistency Rate (quarterly, annualized)
(1) 81.6 % 71.7 % 67.5 %
Total borrower-paid RIF 92.7 % 90.6 % 89.6 %
Primary RIF by premium type
Direct Monthly and Other Recurring Premiums 86.4 % 83.9 % 82.7 %
Direct single premiums (2) 13.6 % 16.1 % 17.3 %
Primary RIF by FICO score (3)
>=740 57.5 % 56.9 % 57.3 %
680-739 34.5 % 35.0 % 34.8 %
620-679 7.6 % 7.6 % 7.4 %
<=619 0.4 % 0.5 % 0.5 %
Primary RIF by LTV
95.01% and above 16.8 % 15.1 % 14.6 %
90.01% to 95.00% 48.4 % 48.9 % 48.9 %
85.01% to 90.00% 27.2 % 27.7 % 27.8 %
85.00% and below 7.6 % 8.3 % 8.7 %
(1)The Persistency Rate on a quarterly, annualized basis is calculated based on
loan-level detail for the quarter ending as of the date shown. It may be
impacted by seasonality or other factors, including the level of refinance
activity during the applicable periods, and may not be indicative of full-year
trends.
(2)Borrower-paid Single Premium Policies were 7.9%, 8.5% and 8.8% of primary RIF
for the periods indicated, respectively.
(3)For loans with multiple borrowers, the percentage of primary RIF by FICO
score represents the lowest of the borrowers' FICO scores.
Risk Distribution
We use third-party reinsurance in our mortgage insurance business as part of our
risk distribution strategy, including to manage our capital position and risk
profile. When we enter into a reinsurance agreement, the reinsurer receives a
premium and, in exchange, insures an agreed-upon portion of incurred losses.
While these arrangements have the impact of reducing our earned premiums, they
also reduce our required capital and are expected to increase our return on
required capital for the related policies.
The impact of these programs on our financial results will vary depending on the
level of ceded RIF, as well as the levels of prepayments and incurred losses on
the reinsured portfolios, among other factors. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Key
Factors Affecting Our Results-Mortgage-Risk
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Distribution" in our 2021 Form 10-K and Note 8 of Notes to Unaudited Condensed
Consolidated Financial Statements in this report for more information about our
reinsurance transactions.
The table below provides information about the amounts by which Radian
Guaranty's reinsurance programs reduced its Minimum Required Assets as of the
dates indicated.
PMIERs benefit from risk distribution
December 31,
($ in thousands) September 30, 2022 2021 September 30, 2021
PMIERs impact - reduction in Minimum
Required Assets
Excess-of-Loss Program $ 732,895 $ 995,171 $ 659,151
Single Premium QSR Program 243,911 314,183 328,339
2022 QSR Agreement 189,408 - -
2012 QSR Agreements 9,310 12,541 14,116
Total PMIERs impact $ 1,175,524 $ 1,321,895 $ 1,001,606
Percentage of gross Minimum Required Assets 24.0 % 28.4 % 22.1 %
Results of Operations-Consolidated
Three and Nine Months Ended
Months Ended
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. Our consolidated operating results for the three and nine months endedSeptember 30, 2022 , andSeptember 30, 2021 , primarily reflect the financial results and performance of our two reportable business segments-Mortgage and homegenius. See "Results of Operations-Mortgage" and "Results of Operations-homegenius" for the operating results of these business segments for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. In addition to the results of our operating segments, pretax income (loss) is also affected by those factors described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Factors Affecting Our Results" in our 2021 Form 10-K. 46
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The following table summarizes our consolidated results of operations for the
three and nine months ended
Summary results of operations - Consolidated
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
($ in thousands, except
per-share amounts) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Revenues
Net premiums earned $ 240,222 $ 249,118 $ (8,896) $ 748,304 $ 775,746 $ (27,442)
Services revenue 20,146 37,773 (17,627) 76,775 90,132 (13,357)
Net investment income 51,414 35,960 15,454 136,567 110,502 26,065
Net gains (losses) on
investments and other financial
instruments (16,252) 2,098 (18,350) (87,578) 12,578 (100,156)
Other income 659 809 (150) 1,934 2,607 (673)
Total revenues 296,189 325,758 (29,569) 876,002 991,565 (115,563)
Expenses
Provision for losses (96,964) 17,305 114,269 (294,640) 67,096 361,736
Policy acquisition costs 5,442 7,924 2,482 17,987 21,758 3,771
Cost of services 18,717 30,520 11,803 66,230 75,381 9,151
Other operating expenses 91,327 86,479 (4,848) 271,363 243,210 (28,153)
Interest expense 21,183 21,027 (156) 62,860 63,207 347
Amortization of other acquired
intangible assets 1,023 862 (161) 2,721 2,587 (134)
Total expenses 40,728 164,117 123,389 126,521 473,239 346,718
Pretax income 255,461 161,641 93,820 749,481 518,326 231,155
Income tax provision 57,181 35,229 (21,952) 168,877 111,100 (57,777)
Net income $ 198,280 $ 126,412 $ 71,868 $ 580,604 $ 407,226 $ 173,378
Diluted net income per share $ 1.20 $ 0.67 $ 0.53 $ 3.34 $ 2.11 $ 1.23
Return on equity 20.7 % 11.8 % 8.9 % 19.4 % 12.7 % 6.7 %
Non-GAAP Financial Measures (1)
Adjusted pretax operating income $ 272,720 $ 160,649 $ 112,071 $ 839,701 $ 512,684 $ 327,017
Adjusted diluted net operating
income per share $ 1.31 $ 0.67 $ 0.64 $ 3.82 $ 2.10 $ 1.72
Adjusted net operating return on
equity 22.5 % 11.8 % 10.7 % 22.1 % 12.6 % 9.5 %
(1)See "-Use of Non-GAAP Financial Measures" below.
Revenues
Net Premiums Earned. The decrease in net premiums earned for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, is primarily driven by a decrease in net premiums earned in our title insurance business. See "Results of Operations-homegenius-Three and Nine Months EndedSeptember 30, 2022 , Compared to Three and Nine Months EndedSeptember 30 , 2021-Revenues-Net Premiums Earned" for more information. The decrease in net premiums earned for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, is primarily driven by a decrease in net premiums earned in our Mortgage segment. See "Results of Operations-Mortgage-Three and Nine Months EndedSeptember 30, 2022 , Compared to Three and Nine Months EndedSeptember 30 , 2021-Revenues-Net Premiums Earned" for more information. 47
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Services Revenue. Services revenue for the three and nine months ended September
30, 2022 , decreased as compared to the same periods in 2021, primarily driven by
the general market decline in mortgage origination volume as well as other
market and macroeconomic conditions, as further described in "Overview-Current
Operating Environment." See "Results of Operations-Mortgage-Three and Nine
Months Ended September 30, 2022 , Compared to Three and Nine Months Ended
September 30 , 2021-Revenues-Services Revenue" and "Results of
Operations-homegenius-Three and Nine Months Ended September 30, 2022 , Compared
to Three and Nine Months Ended September 30 , 2021-Revenues-Services Revenue" for
more information.
Net Investment Income. The increase in net investment income for the three and
nine months ended September 30, 2022 , as compared to the same periods in 2021,
is primarily attributable to higher market interest rates. See "Overview-Current
Operating Environment" and "Results of Operations-Mortgage-Three and Nine Months
Ended September 30, 2022 , Compared to Three and Nine Months Ended September 30 ,
2021-Revenues-Net Investment Income" for more information.
Net Gains (Losses) on Investments and Other Financial Instruments. The increase
in net losses on investments and other financial instruments for the three and
nine months ended September 30, 2022 , as compared to the same periods in 2021,
is primarily due to the impact of rising interest rates as well as other market
and macroeconomic conditions, as further discussed in "Overview-Current
Operating Environment." See Note 6 of Notes to Unaudited Condensed Consolidated
Financial Statements for additional detail about net gains (losses) on
investments and other financial instruments by investment category.
Expenses
Provision for Losses. The decrease in provision for losses for the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2021, is primarily driven by favorable development on prior period defaults, which impacted our mortgage insurance reserves. See "Results of Operations-Mortgage-Three and Nine Months EndedSeptember 30, 2022 , Compared to Three and Nine Months EndedSeptember 30 , 2021-Expenses-Provision for Losses" for more information. Cost of Services. Cost of services for the three and nine months endedSeptember 30, 2022 , decreased as compared to the same periods in 2021, primarily driven by the decrease in services revenue, as discussed above. See "Results of Operations-Mortgage-Three and Nine Months EndedSeptember 30, 2022 , Compared to Three and Nine Months EndedSeptember 30 , 2021-Expenses-Cost of Services" and "Results of Operations-homegenius-Three and Nine Months EndedSeptember 30, 2022 , Compared to Three and Nine Months EndedSeptember 30 , 2021-Expenses-Cost of Services" for more information. Other Operating Expenses. The increase in other operating expenses for the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2021, is primarily due to: (i) an increase in salaries and other base employee expenses; (ii) an increase in other general operating expenses; and (iii) a decrease in ceding commissions. These increases in other operating expenses were partially offset by a net decrease in variable and share-based incentive compensation expense. See "Results of Operations-Mortgage-Three and Nine Months EndedSeptember 30, 2022 , Compared to Three and Nine Months EndedSeptember 30 , 2021-Expenses-Other Operating Expenses" and "Results of Operations-homegenius-Three and Nine Months EndedSeptember 30, 2022 , Compared to Three and Nine Months EndedSeptember 30 , 2021-Expenses-Other Operating Expenses" for more information.
Income Tax Provision
Variations in our effective tax rates, combined with differences in pretax income, were the drivers of the changes in our income tax provision between periods. Our effective tax rate for the three and nine months endedSeptember 30, 2022 , was 22.4% and 22.5%, respectively, as compared to 21.8% and 21.4% for the same periods in 2021, respectively. Our effective tax rates for the three and nine months endedSeptember 30, 2022 , were higher than the statutory rate of 21% primarily due to the impact of state income taxes and certain permanent book-to-tax adjustments.
Use of Non-GAAP Financial Measures
In addition to the traditional GAAP financial measures, we have presented
"adjusted pretax operating income (loss)," "adjusted diluted net operating
income (loss) per share" and "adjusted net operating return on equity," which
are non-GAAP financial measures for the consolidated company, among our key
performance indicators to evaluate our fundamental financial performance. These
non-GAAP financial measures align with the way our business performance is
evaluated by both management and by our board of directors. These measures have
been established in order to increase transparency for the purposes of
evaluating our operating trends and enabling more meaningful comparisons with
our peers. Although on a consolidated basis adjusted pretax operating income
(loss), adjusted diluted net operating income (loss) per share and adjusted net
operating return on equity are non-GAAP financial measures, for the reasons
discussed above we believe these measures aid in understanding the underlying
performance of our operations.
Total adjusted pretax operating income (loss), adjusted diluted net operating
income (loss) per share and adjusted net operating return on equity are not
measures of overall profitability, and therefore should not be considered in
isolation or
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viewed as substitutes for GAAP pretax income (loss), diluted net income (loss)
per share or return on equity. Our definitions of adjusted pretax operating
income (loss), adjusted diluted net operating income (loss) per share and
adjusted net operating return on equity, as discussed and reconciled below to
the most comparable respective GAAP measures, may not be comparable to
similarly-named measures reported by other companies.
Our senior management, including our Chief Executive Officer (Radian's chief
operating decision maker), uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of the
Company's business segments and to allocate resources to the segments. See Note
4 of Notes to Consolidated Financial Statements and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations-Consolidated-Use of Non-GAAP Financial Measures," each in our 2021
Form 10-K, for detailed information regarding items excluded from adjusted
pretax operating income (loss) and the reasons for their treatment.
Adjusted pretax operating income (loss) is defined as GAAP consolidated pretax
income (loss) excluding the effects of: (i) net gains (losses) on investments
and other financial instruments, except for certain investments attributable to
our reportable segments; (ii) gains (losses) on extinguishment of debt; (iii)
amortization and impairment of goodwill and other acquired intangible assets;
and (iv) impairment of other long-lived assets and other non-operating items,
such as impairment of internal-use software, gains (losses) from the sale of
lines of business and acquisition-related income and expenses.
The following table provides a reconciliation of consolidated pretax income to
our non-GAAP financial measure for the consolidated Company of adjusted pretax
operating income.
Reconciliation of consolidated pretax income to consolidated adjusted pretax operating income
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2022 2021 2022 2021
Consolidated pretax income $ 255,461 $ 161,641 $ 749,481 $ 518,326
Less income (expense) items
Net gains (losses) on investments and other
financial instruments (16,252) 2,098 (87,578) 12,578
Amortization of other acquired intangible assets (1,023)
(862) (2,721) (2,587) Impairment of other long-lived assets and other non-operating items 16 (244) 79 (4,349) Total adjusted pretax operating income (1)$ 272,720 $
160,649
(1)Total adjusted pretax operating income on a consolidated basis consists of
adjusted pretax operating income (loss) for our Mortgage segment, homegenius
segment and All Other activities, as further detailed in Note 4 of Notes to
Unaudited Condensed Consolidated Financial Statements.
Adjusted diluted net operating income (loss) per share is calculated by dividing
(i) adjusted pretax operating income (loss) attributable to common stockholders,
net of taxes computed using the Company's statutory tax rate, by (ii) the sum of
the weighted average number of common shares outstanding and all dilutive
potential common shares outstanding. The following table provides a
reconciliation of diluted net income (loss) per share to our non-GAAP financial
measure for the consolidated Company of adjusted diluted net operating income
(loss) per share.
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Reconciliation of diluted net income per share to adjusted diluted net operating income per share
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Diluted net income per share $ 1.20 $ 0.67 $ 3.34 $ 2.11
Less per-share impact of reconciling income
(expense) items
Net gains (losses) on investments and other
financial instruments (0.10) 0.01 (0.50) 0.07
Amortization of other acquired intangible assets (0.01) - (0.02) (0.01)
Impairment of other long-lived assets and other
non-operating items - - - (0.02)
Income tax (provision) benefit on reconciling
income (expense) items (1) 0.02 - 0.11 (0.01)
Difference between statutory and effective tax
rates (0.02) (0.01) (0.07) (0.02)
Per-share impact of reconciling income (expense)
items (0.11) - (0.48) 0.01
Adjusted diluted net operating income per share
(1) $ 1.31 $ 0.67 $ 3.82 $ 2.10
(1)Calculated using the Company's federal statutory tax rate of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
Adjusted net operating return on equity is calculated by dividing annualized
adjusted pretax operating income (loss), net of taxes computed using the
Company's statutory tax rate, by average stockholders' equity, based on the
average of the beginning and ending balances for each period presented. The
following table provides a reconciliation of return on equity to our non-GAAP
financial measure for the consolidated Company of adjusted net operating return
on equity.
Reconciliation of return on equity to adjusted net operating return on equity
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Return on equity (1) 20.7 % 11.8 % 19.4 % 12.7 %
Less impact of reconciling income (expense) items (2)
Net gains (losses) on investments and other financial
instruments
(1.7) 0.2 (2.9) 0.4 Amortization of other acquired intangible assets (0.1) (0.1) (0.1) (0.1) Impairment of other long-lived assets and other non-operating items - - - (0.1)
Income tax (provision) benefit on reconciling income
(expense) items (3)
0.4 - 0.6 -
Difference between statutory and effective tax rates (0.4) (0.1) (0.3) (0.1)
Impact of reconciling income (expense) items (1.8) - (2.7) 0.1
Adjusted net operating return on equity (3) 22.5 % 11.8 % 22.1 % 12.6 %
(1)Calculated by dividing annualized net income (loss) by average stockholders'
equity, based on the average of the beginning and ending balances for each
period presented.
(2)Annualized, as a percentage of average stockholders' equity.
(3)Calculated using the Company's federal statutory tax rate of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
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Results of Operations-Mortgage
Three and Nine Months Ended
Months Ended
The following table summarizes our Mortgage segment's results of operations for
the three and nine months ended
Summary results of operations - Mortgage
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In thousands) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Revenues
Net premiums written $ 235,076 $ 228,116 $ 6,960 $ 732,081 $ 706,017 $ 26,064
(Increase) decrease in unearned
premiums 121 8,751 (8,630) (4,801) 42,600 (47,401)
Net premiums earned 235,197 236,867 (1,670) 727,280 748,617 (21,337)
Services revenue 405 5,027 (4,622) 7,062 13,110 (6,048)
Net investment income 44,842 32,158 12,684 119,056 99,013 20,043
Other income 589 607 (18) 1,864 2,017 (153)
Total revenues 281,033 274,659 6,374 855,262 862,757 (7,495)
Expenses
Provision for losses (97,493) 16,794 114,287 (295,865) 65,997 361,862
Policy acquisition costs 5,442 7,924 2,482 17,987 21,758 3,771
Cost of services 373 3,865 3,492 5,716 10,218 4,502
Other operating expenses 55,853 59,829 3,976 174,528 166,605 (7,923)
Interest expense 21,183 21,027 (156) 62,860 63,207 347
Total expenses (14,642) 109,439 124,081 (34,774) 327,785 362,559
Adjusted pretax operating income (1)
(1)Our senior management uses adjusted pretax operating income as our primary
measure to evaluate the fundamental financial performance of our business
segments. See Note 4 of Notes to Unaudited Condensed Consolidated Financial
Statements for more information.
Revenues
Net Premiums Earned. Net premiums earned decreased for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily due to: (i) a decrease in the impact, net of reinsurance, from Single Premium Policy cancellations due to lower refinance activity and (ii) a decrease in premiums earned on our Monthly Premium Policies due to lower average premium yields. These items were partially offset by an increase in the profit commission retained by the Company, due to favorable reserve development in the nine months endedSeptember 30, 2022 . 51
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The table below provides additional information about the components of mortgage
insurance net premiums earned for the periods indicated, including the effects
of our reinsurance programs.
Net premiums earned
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
($ in thousands, except as
otherwise indicated) 2022 2021 2022 vs. 2021 2022 2021 2022 vs.
2021
Direct
Premiums earned, excluding revenue from cancellations$ 250,140 $ 239,786 $ 10,354 $ 743,676 $ 739,768 $ 3,908 Single Premium Policy cancellations 6,705 25,592 (18,887) 28,295 95,694 (67,399) Direct 256,845 265,378 (8,533) 771,971 835,462 (63,491) Assumed (1) 1,211 1,683 (472) 4,081 5,596 (1,515) Ceded Premiums earned, excluding revenue from cancellations (38,879) (27,662) (11,217) (94,783) (80,359) (14,424) Single Premium Policy cancellations (2) (1,844) (7,338) 5,494 (8,001) (27,483) 19,482 Profit commission-other (3) 17,864 4,806 13,058 54,012 15,401
38,611
Ceded premiums, net of profit commission (22,859) (30,194) 7,335 (48,772) (92,441)
43,669
Total net premiums earned$ 235,197 $ 236,867
In force portfolio premium yield (in basis points) (4) 39.2 40.3 (1.1) 39.5 40.7
(1.2)
Direct premium yield (in basis points) (5) 40.2 44.6 (4.4) 41.0 46.0 (5.0) Net premium yield (in basis points) (6) 36.7 39.6 (2.9) 38.4 40.9 (2.5) Average primary IIF (in billions) (7)$ 256.7 $ 239.4 $ 17.3$ 252.5 $ 243.9 $ 8.6 (1)Includes premiums earned from our participation in certain credit risk transfer programs. (2)Includes the impact of related profit commissions. (3)Represents the profit commission from the Single Premium QSR Program and 2022 QSR Agreement, excluding the impact of Single Premium Policy cancellations. (4)Calculated by dividing annualized direct premiums earned, including assumed revenue and excluding revenue from cancellations, by average primary IIF. (5)Calculated by dividing annualized direct premiums earned, including assumed revenue, by average primary IIF. (6)Calculated by dividing annualized net premiums earned by average primary IIF. (7)The average of beginning and ending balances of primary IIF, for each period presented. The level of mortgage prepayments affects the revenue ultimately produced by our mortgage insurance business and is influenced by the mix of business we write. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Factors Affecting Our Results-Mortgage-IIF and Related Drivers" in our 2021 Form 10-K for more information. 52
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The following table provides information related to the impact of our
reinsurance transactions on premiums earned. See Note 8 of Notes to Unaudited
Condensed Consolidated Financial Statements for more information about our
reinsurance programs.
Ceded premiums earned
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2022 2021 2022 2021
Single Premium QSR Program $ (3,465) (1) $ 12,752 $ (15,493) (1) $ 44,694
Excess-of-Loss Program 22,184 16,581 59,064 44,336
2022 QSR Agreement 3,694 - 3,694 -
Other 446 861 1,507 3,411
Total ceded premiums earned (2) $ 22,859 $
30,194
Percentage of total direct and assumed premiums earned 8.6 % 10.8 % 6.1 % 10.7 % (1)Includes the increase in the profit commission retained by the Company due to favorable reserve development in 2022 periods. See "-Expenses-Provision for Losses" below for additional information on the favorable reserve development. (2)Does not include the benefit from ceding commissions from the reinsurance agreements in our QSR Program, which is primarily included in other operating expenses on the condensed consolidated statements of operations. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information. Services Revenue. Services revenue for the three and nine months endedSeptember 30, 2022 , decreased as compared to the same periods in 2021, primarily driven by the termination of a contract with a large fulfillment customer as well as a decrease in demand for our contract underwriting services as a result of the general market decline in mortgage origination volume. For more information on recent macroeconomic stresses see "Overview-Current Operating Environment." Net Investment Income. Increasing yields from higher interest rates were the primary driver of the increases in net investment income for the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2021.
The following table provides information related to our Mortgage subsidiaries'
investment balances and investment yields.
Investment balances and yields
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
($ in thousands) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Investment income $ 46,406 $ 33,633 $ 12,773 $ 123,627 $ 103,665 $ 19,962
Investment expenses (1,564) (1,475) (89) (4,571) (4,652) 81
Net investment income $ 44,842 $ 32,158 $ 12,684 $ 119,056 $ 99,013 $ 20,043
Average investments (1) $ 5,613,010 $ 5,704,427 $ (91,417) $ 5,729,948 $ 5,587,746 $ 142,202
Average investment yield (2) 3.2 % 2.3 % 0.9 % 2.8 % 2.4 % 0.4 %
(1) The average of the beginning and ending amortized cost, for each period
presented, of investments held by our Mortgage subsidiaries.
(2) Calculated by dividing annualized net investment income by average
investments balance.
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Expenses
Provision for Losses. The following table details the financial impact of the
significant components of our provision for losses for the periods indicated.
Provision for losses
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
($ in thousands, except
reserve per new default) 2022 2021 2022 vs. 2021 2022 2021 2022 vs.
2021
Current period defaults (1)
(5,884)
Prior period defaults (2) (136,684) (16,513)
120,171 (411,024) (53,827) 357,197
Total provision for losses
114,287
Loss ratio (3) (41.5) % 7.1 % 48.6 % (40.7) % 8.8 % 49.5 %
Reserve per new default (4)
14$ 4,265 $ 4,260 $ (5) (1)Related to defaulted loans with the most recent default notice dated in the period indicated. For example, if a loan had defaulted in a prior period, but then subsequently cured and later re-defaulted in the current period, the default would be considered a current period default. (2)Related to defaulted loans with a default notice dated in a period earlier than the period indicated, which have been continuously in default since that time. (3)Provision for losses as a percentage of net premiums earned. See "-Revenues-Net Premiums Earned" above for additional information on the changes in net premiums earned. (4)Calculated by dividing provision for losses for new defaults, net of reinsurance, by new primary defaults for each period. Our mortgage insurance provision for losses for the three and nine months endedSeptember 30, 2022 , decreased by$114.3 million and$361.9 million , respectively, as compared to the same periods in 2021. Current period new primary defaults increased by 18.1% for the three months endedSeptember 30, 2022 , and decreased by 4.0% for the nine months endedSeptember 30, 2022 , each as compared to the same periods in 2021, as shown below. Our gross Default to Claim Rate assumption for new primary defaults was 8.0% at bothSeptember 30, 2022 and 2021, as we continue to closely monitor the trends in Cures and claims paid for our default inventory, while also weighing the risks and uncertainties associated with the current economic environment. Our provision for losses during the three and nine months endedSeptember 30, 2022 , benefited from favorable reserve development on prior period defaults, primarily as a result of more favorable trends in Cures than originally estimated due to favorable outcomes resulting from mortgage forbearance programs implemented in response to the COVID-19 pandemic as well as positive trends in home price appreciation. These favorable observed trends resulted in reductions in our Default to Claim Rate assumptions for prior year default notices, particularly for those defaults first reported in 2020 following the start of the COVID-19 pandemic. See Note 11 herein for additional information, as well as Notes 1 and 11 of Notes to Consolidated Financial Statements and "Item 1A. Risk Factors" in our 2021 Form 10-K. Our primary default rate as a percentage of total insured loans atSeptember 30, 2022 , was 2.1% compared to 2.9% atDecember 31, 2021 . The following table shows a rollforward of our primary loans in default.
Rollforward of primary loans in default
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Beginning default inventory 21,861 40,464 29,061 55,537
New defaults 9,601 8,132 27,003 28,128
Cures (10,222) (14,475) (34,563) (49,293)
Claims paid (141) (321) (352) (562)
Rescissions and Claim Denials (1) (22) (5) (72) (15)
Ending default inventory 21,077 33,795 21,077 33,795
(1)Net of any previous Rescissions and Claim Denials that were reinstated during
the period. Such reinstated Rescissions and Claim Denials may ultimately result
in a paid claim.
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The following tables show additional information about our primary loans in
default as of the dates indicated.
Primary loans in default - additional information
September 30, 2022
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 3rd Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 7,916 37.5 % 17 38.0 % $ 68,988 15.2 %
Four to eleven payments 6,514 30.9 157 30.5 119,597 26.3
Twelve payments or more 6,337 30.1 736 25.7 250,749 55.1
Pending claims 310 1.5 N/A 26.7 15,392 3.4
Total 21,077 100.0 % 910 454,726 100.0 %
LAE 11,443
IBNR 2,229
Total primary reserve (1) $ 468,398
December 31, 2021
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 4th Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 7,267 25.0 % 47 39.4 % $ 62,103 7.9 %
Four to eleven payments 8,088 27.8 84 27.6 146,872 18.6
Twelve payments or more 13,389 46.1 784 29.0 565,192 71.5
Pending claims 317 1.1 N/A 10.4 16,213 2.0
Total 29,061 100.0 % 915 790,380 100.0 %
LAE 19,859
IBNR 2,886
Total primary reserve (1) $ 813,125
N/A - Not applicable
(1) Excludes pool and other reserves. See Note 11 of Notes to Unaudited
Condensed Consolidated Financial Statements for additional information.
We develop our Default to Claim Rate estimates based primarily on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. See Note 11 of Notes to Consolidated Financial Statements in our 2021 Form 10-K for additional details about our Default to Claim Rate assumptions. Our aggregate weighted average net Default to Claim Rate assumption for our primary loans used in estimating our reserve for losses, which is net of estimated Claim Denials and Rescissions, was approximately 37% atSeptember 30, 2022 , compared to 46% atDecember 31, 2021 . See Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements for information regarding our reserves for losses and a reconciliation of our Mortgage segment's beginning and ending reserves for losses and LAE. We considered the sensitivity of our loss reserve estimates atSeptember 30, 2022 , by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate for primary loans. For example, assuming all other factors remain constant, for every one percentage point absolute change in primary Claim Severity for our primary insurance risk exposure (which we estimated to be 99% of our risk exposure at each ofSeptember 30, 2022 , andDecember 31, 2021 ), we estimated that our total loss reserve atSeptember 30, 2022 , would change by approximately$4.6 million . Assuming the portfolio mix and all other factors remain constant, for every one percentage point absolute change in our primary net Default to Claim Rate, we estimated a$12.2 million change in our primary loss reserve atSeptember 30, 2022 . Although expected claims are included in our reserve for losses, the timing of claims paid is subject to fluctuation from quarter to quarter based on the rate that defaults cure and other factors, including the impact of foreclosure moratoriums (as described in "Item 1. Business-Mortgage-Defaults and Claims" in our 2021 Form 10-K) that make the timing of paid claims difficult to predict. 55
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The following table shows net claims paid by product and the average claim paid
by product for the periods indicated.
Claims paid
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2022 2021 2022 2021
Net claims paid (1)
Primary $ 3,606 $ 5,330 $ 12,418 $ 16,811
Pool and other (420) 991 (1,231) 204
Subtotal 3,186 6,321 11,187 17,015
Impact of commutations and settlements 1,317 3,915 1,317 7,915
Total net claims paid $ 4,503 $ 10,236
Total average net primary claim paid (1) (2)
$ 42.5 $ 44.1 Average direct primary claim paid (2) (3)$ 45.2 $ 43.2
(1)Net of reinsurance recoveries. (2)Calculated without giving effect to the impact of commutations and settlements. (3)Before reinsurance recoveries. Cost of Services. Cost of services for the three and nine months endedSeptember 30, 2022 , decreased as compared to the same periods in 2021, primarily due to the decrease in services revenue, as discussed above. Our cost of services is primarily affected by our level of services revenue. Other Operating Expenses. The decrease in other operating expenses for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, is primarily related to a decrease in variable and share-based incentive compensation expense, including as part of allocated corporate operating expenses. The increase in other operating expenses for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily reflects a decrease in ceding commissions, due primarily to a decline in Single Premium Policy cancellations covered by our Single Premium QSR Program. This increase in other operating expenses is partially offset by a net decrease in variable and share-based incentive compensation expense. 56
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The following table shows additional information about Mortgage other operating
expenses.
Other operating expenses
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
($ in thousands) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Direct
Salaries and other base
employee expenses $ 13,275 $ 12,068 $ (1,207) $ 37,059 $ 37,397 $ 338
Variable and share-based
incentive compensation 3,550 6,257 2,707 13,220 15,218 1,998
Other general operating
expenses 10,843 13,180 2,337 33,411 39,642 6,231
Ceding commissions (4,273) (5,638) (1,365) (11,066) (19,828) (8,762)
Total direct 23,395 25,867 2,472 72,624 72,429 (195)
Allocated (1)
Salaries and other base
employee expenses 10,549 10,617 68 33,374 $ 31,150
(2,224)
Variable and share-based incentive compensation 6,636 10,886 4,250 25,187 26,108 921 Other general operating expenses 15,273 12,459 (2,814) 43,343 36,918 (6,425) Total allocated 32,458 33,962 1,504 101,904 94,176 (7,728)
Total other operating expenses
3,976$ 174,528 $ 166,605 $ (7,923) Expense ratio (2) 26.1 % 28.6 % 2.5 % 26.5 % 25.2 % (1.3) % (1)See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements for more information about our allocation of corporate operating expenses. (2)Operating expenses (which include policy acquisition costs and other operating expenses, as well as allocated corporate operating expenses), expressed as a percentage of net premiums earned. See "-Revenues-Net Premiums Earned" above for additional information on the changes in net premiums earned.
Results of Operations-homegenius
Three and Nine Months Ended
Months Ended
The following table summarizes our homegenius segment's results of operations for the three and nine months endedSeptember 30, 2022 and 2021. As discussed in "Overview-Current Operating Environment," the macroeconomic stresses beginning in the second quarter of 2022 impacted our homegenius business, including in particular a decrease in our title revenues due to the rapid decline in industrywide refinance volumes. We expect this trend to continue to impact the results of our homegenius segment in at least the near-term based on current market conditions and our expectation that overall refinance volumes will remain low. 57
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Summary results of operations - homegenius
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In thousands) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Revenues
Net premiums earned $ 5,025 $ 12,251 $ (7,226) $ 21,024 $ 27,129 $ (6,105)
Services revenue 19,812 32,805 (12,993) 69,951 77,105 (7,154)
Net investment income 246 35 211 363 103 260
Total revenues 25,083 45,091 (20,008) 91,338 104,337 (12,999)
Expenses
Provision for losses 435 540 105 1,225 1,171 (54)
Cost of services 18,344 26,646 8,302 60,514 65,107 4,593
Other operating expenses 31,840 23,462 (8,378) 86,331 63,267 (23,064)
Total expenses 50,619 50,648 29 148,070 129,545 (18,525)
Adjusted pretax operating
income (loss) (1) $ (25,536) $ (5,557) $ (19,979) $ (56,732) $ (25,208) $ (31,524)
(1)Our senior management uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of each of our
business segments. See Note 4 of Notes to Unaudited Condensed Consolidated
Financial Statements.
Revenues
Net Premiums Earned. Net premiums earned for the three and nine months endedSeptember 30, 2022 , decreased as compared to the same periods in 2021, primarily due to a decrease in new title policies written and closed orders in our title insurance business. Services Revenue. Services revenue for the three and nine months endedSeptember 30, 2022 , decreased as compared to the same periods in 2021, primarily due to a decrease in title services revenues resulting from the recent macroeconomic stresses, as described above. See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements for the disaggregation of services revenue by revenue type. Expenses Cost of Services. Cost of services for the three and nine months endedSeptember 30, 2022 , decreased as compared to the same periods in 2021, primarily due to the decrease in services revenue. Our cost of services is primarily affected by our level of services revenue and the number of employees providing those services. Other Operating Expenses. The increase in other operating expenses for the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2021, primarily reflects continued strategic investments focused on our title and digital real estate businesses, including an increase in staffing levels resulting in higher salaries and other base employee expenses. 58
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table shows additional information about homegenius other
operating expenses.
Other operating expenses
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In thousands) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Direct
Salaries and other base
employee expenses $ 11,572 $ 5,415 $ (6,157) $ 30,461 $ 17,395 $ (13,066)
Variable and share-based
incentive compensation 3,312 4,652 1,340 10,721 11,302 581
Other general operating
expenses 9,549 6,210 (3,339) 23,846 15,502 (8,344)
Title agent commissions 1,850 2,267 417 4,748 5,433 685
Total direct 26,283 18,544 (7,739) 69,776 49,632 (20,144)
Allocated (1)
Salaries and other base
employee expenses 2,507 1,560 (947) 6,180 4,571 (1,609)
Variable and share-based
incentive compensation 441 1,586 1,145 3,330 3,806 476
Other general operating
expenses 2,609 1,772 (837) 7,045 5,258 (1,787)
Total allocated 5,557 4,918 (639) 16,555 13,635 (2,920)
Total other operating expenses
(1)See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements
for more information about our allocation of corporate operating expenses.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations-All Other
Three and Nine Months Ended
Months Ended
The following table summarizes our All Other results of operations for the three
and nine months ended
Summary results of operations - All Other
Change Change
Three Months Ended Favorable Nine Months Ended Favorable
September 30, (Unfavorable) September 30, (Unfavorable)
(In thousands) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Revenues
Services revenue $ - $ 27 $ (27) $ - $ 124 $ (124)
Net investment income 6,326 3,767 2,559 17,148 11,386 5,762
Other income 70 202 (132) 70 590 (520)
Total revenues 6,396 3,996 2,400 17,218 12,100 5,118
Expenses
Cost of services - 9 9 - 56 56
Other operating expenses 3,815 3,001 (814) 10,821 9,124 (1,697)
Total expenses 3,815 3,010 (805) 10,821 9,180 (1,641)
Adjusted pretax operating income
(1) $ 2,581 $ 986 $ 1,595 $ 6,397 $ 2,920 $ 3,477
(1)Our senior management uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of each of our
business segments. See Note 4 of Notes to Unaudited Condensed Consolidated
Financial Statements.
In July 2022 , we announced the launch of Radian Mortgage Capital , a mortgage
conduit formed to provide residential mortgage lenders with an additional
secondary-market option to sell eligible loans to us and to provide mortgage
investors with another known sponsor. Subject to market conditions, Radian
Mortgage Capital plans to leverage our lender relationships to aggregate
residential mortgage loans, which Radian Mortgage Capital expects to then
distribute into the capital markets through private label securitizations or
sell directly to mortgage investors, with the option to retain and manage
structured components of the underlying credit risk where we see value.
Consistent with our stated strategy, Radian Mortgage Capital expands our
capabilities to participate in the mortgage market to aggregate, manage and
distribute residential mortgage credit risk.
Radian Mortgage Capital's financial results are part of this All Other category.
As of September 30, 2022 , Radian Mortgage Capital had entered into commitments
to purchase an immaterial amount of loans, which were acquired in October 2022 .
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
Consolidated Cash Flows
The following table summarizes our consolidated cash flows from operating,
investing and financing activities.
Summary cash flows - Consolidated
Nine Months Ended
September 30,
(In thousands) 2022 2021
Net cash provided by (used in):
Operating activities $ 282,148 $ 403,304
Investing activities 48,556 (33,984)
Financing activities (427,516) (306,891)
Increase (decrease) in cash and restricted cash
Operating Activities. Our most significant source of operating cash flows is from premiums received from our mortgage insurance policies, while our most significant uses of operating cash flows are typically for our operating expenses and claims paid on our mortgage insurance policies. The$121.2 million decline in cash provided by operating activities for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was principally due to: (i) higher purchases ofU.S. Mortgage Guaranty Tax and Loss Bonds; (ii) higher payments for other operating expenses, primarily related to incentive compensation; and (iii) lower direct premiums written, due primarily to lower Single Premium Policy NIW resulting from reduced refinancing activity. Investing Activities. Net cash provided by investing activities was$48.6 million for the nine months endedSeptember 30, 2022 , as compared to net cash used in investing activities of$34.0 million for the same period in 2021. This change was primarily the result of an increase in sales and redemptions, net of purchases, of short-term investments, and a decrease in purchases of equity securities, partially offset by a decrease in proceeds and redemptions, net of purchases on fixed-maturity investments available for sale. Financing Activities. For the nine months endedSeptember 30, 2022 , our primary financing activities impacting cash included: (i) repurchases of our common stock; (ii) payment of dividends and dividend equivalents; and (iii) net changes in secured borrowings. See Notes 12 and 14 of Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our borrowings and share repurchases, respectively.
See "Item 1. Financial Statements (Unaudited)-Condensed Consolidated Statements
of Cash Flows (Unaudited)" for additional information.
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. AtSeptember 30, 2022 ,Radian Group had available, either directly or through unregulated subsidiaries, unrestricted cash and liquid investments of$572.6 million . Available liquidity atSeptember 30, 2022 , excludes certain additional cash and liquid investments that have been advanced toRadian Group from its subsidiaries to pay for corporate expenses and interest payments. Total liquidity, which includes our undrawn$275.0 million unsecured revolving credit facility, as described below, was$847.6 million as ofSeptember 30, 2022 . During the nine months endedSeptember 30, 2022 ,Radian Group's available liquidity decreased by$32.3 million , due primarily to share repurchases and payments for dividends, as described below, partially offset by a$500 million return of capital from Radian Guaranty toRadian Group paid inFebruary 2022 . In addition to available cash and marketable securities,Radian Group's principal sources of cash to fund future liquidity needs include: (i) payments made toRadian Group by its subsidiaries under expense- and tax-sharing arrangements; (ii) net investment income earned on its cash and marketable securities; (iii) to the extent available, dividends or other distributions from its subsidiaries; and (iv) amounts, if any, that Radian Guaranty is able to repay under the Surplus Note due 2027.Radian Group also has in place a$275.0 million unsecured revolving credit facility with a syndicate of bank lenders. Subject to certain limitations, borrowings under the revolving credit facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to our insurance subsidiaries as well as growth initiatives. AtSeptember 30, 2022 , the full$275.0 million remains undrawn and available under the facility. See Note 12 of Notes to Consolidated Financial Statements in our 2021 Form 10-K for additional information on the unsecured revolving credit facility. 61
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In connection with the recent launch of our mortgage conduit, Radian Group has
entered into two Parent Guarantees to guaranty the obligations of certain of its
subsidiaries in connection with two separate $300 million mortgage loan
repurchase facilities. Under these Parent Guarantees, Radian Group is subject to
negative and affirmative covenants customary for this type of financing
transaction, including compliance with financial covenants that are generally
consistent with the comparable covenants in the Company's revolving credit
facility. See Note 12 of Notes to Unaudited Condensed Consolidated Financial
Statements for additional information.
We expect Radian Group's principal liquidity demands for the next 12 months to
be: (i) the payment of corporate expenses, including taxes; (ii) interest
payments on our outstanding debt obligations; (iii) the payment of quarterly
dividends on our common stock, which we increased in February 2022 from $0.14 to
$0.20 per share and which remains subject to approval by our board of directors
and our ongoing assessment of our financial condition and potential needs
related to the execution and implementation of our business plans and
strategies; (iv) the potential continued repurchases of shares of our common
stock pursuant to share repurchase authorizations, as described below; (v)
investments to support our business strategy, including capital contributions to
our subsidiaries; and (vi) potential payments pursuant to the Parent Guarantees.
In addition to our ongoing short-term liquidity needs discussed above, our most
significant need for liquidity beyond the next 12 months is the repayment of
$1.4 billion aggregate principal amount of our senior debt due in future years.
See "-Capitalization-Holding Company " below for details of our debt maturity
profile. Radian Group's liquidity demands for the next 12 months or in future
periods could also include: (i) early repurchases or redemptions of portions of
our debt obligations and (ii) additional investments to support our business
strategy, including additional capital contributions to our subsidiaries. For
additional information about related risks and uncertainties, see "-Radian
Group's sources of liquidity may be insufficient to fund its obligations" and
"-Radian Guaranty may fail to maintain its eligibility status with the GSEs, and
the additional capital required to support Radian Guaranty's eligibility could
reduce our available liquidity" under "Item 1A. Risk Factors" in our 2021 Form
10-K.
We believe that Radian Group has sufficient current sources of liquidity to fund
its obligations. If we otherwise decide to increase our liquidity position,
Radian Group may seek additional capital, including by incurring additional
debt, issuing additional equity, or selling assets, which we may not be able to
do on favorable terms, if at all.
Share Repurchases. During the nine months ended September 30, 2022 , the Company
repurchased 19.5 million shares of Radian Group common stock under programs
authorized by Radian Group's board of directors, at a total cost of $399.2
million , including commissions. See Note 14 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional details on our share repurchase
program.
Dividends and Dividend Equivalents. On February 9, 2022 , Radian Group's board of
directors authorized an increase to the Company's quarterly dividend from $0.14
to $0.20 per share. Based on our current outstanding shares of common stock and
RSUs, we expect to require approximately $126 million in the aggregate to pay
dividends and dividend equivalents for the next 12 months. So long as no default
or event of default exists under its revolving credit facility or the Parent
Guarantees, Radian Group is not subject to any limitations on its ability to pay
dividends except those generally applicable to corporations that are
incorporated in Delaware . See Note 12 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional details. The declaration and
payment of future quarterly dividends remains subject to the board of directors'
determination.
Corporate Expenses and Interest Expense. Radian Group has expense-sharing
arrangements in place with its principal operating subsidiaries that require
those subsidiaries to pay their allocated share of certain holding-company-level
expenses, including interest payments on Radian Group's outstanding debt
obligations. Corporate expenses and interest expense on Radian Group's debt
obligations allocated under these arrangements during the nine months ended
September 30, 2022 , of $119.6 million and $61.9 million , respectively, were
substantially all reimbursed by its subsidiaries. We expect substantially all of
our holding company expenses to continue to be reimbursed by our subsidiaries
under our expense-sharing arrangements. The expense-sharing arrangements between
Radian Group and its mortgage insurance subsidiaries, as amended, have been
approved by the Pennsylvania Insurance Department , but such approval may be
modified or revoked at any time.
Taxes. Pursuant to our tax-sharing agreements, our operating subsidiaries pay
Radian Group an amount equal to any federal income tax the subsidiary would have
paid on a standalone basis if they were not part of our consolidated tax return.
As a result, from time to time, under the provisions of our tax-sharing
agreements, Radian Group may pay to or receive from its operating subsidiaries
amounts that differ from Radian Group's consolidated federal tax payment
obligation. During the nine months ended September 30, 2022 , Radian Group
received $22.3 million of tax-sharing agreement payments from its operating
subsidiaries.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table presents our holding company capital structure.
Capital structure
September 30, December 31,
(In thousands, except per-share amounts and ratios) 2022 2021
Debt
Senior Notes due 2024 $ 450,000 $ 450,000
Senior Notes due 2025 525,000 525,000
Senior Notes due 2027 450,000 450,000
Deferred debt costs on senior notes (12,527) (15,527)
Revolving credit facility - -
Total 1,412,473 1,409,473
Stockholders' equity 3,738,050 4,258,796
Total capitalization $ 5,150,523 $ 5,668,269
Debt-to-capital ratio 27.4 % 24.9 %
Shares outstanding 157,058 175,421
Book value per share $ 23.80 $ 24.28
Stockholders' equity decreased by $520.7 million from December 31, 2021 , to
September 30, 2022 . The net decrease in stockholders' equity for the nine months
ended September 30, 2022 , resulted primarily from net unrealized losses in
available for sale securities of $622.4 million as a result of an increase in
market interest rates during the period, share repurchases of $399.2 million and
dividends of $104.7 million , partially offset by our net income of $580.6
million . Given our intent and ability as of September 30, 2022 , to hold these
securities until recovery of their amortized cost basis, we do not expect to
realize a loss on any of our investments in an unrealized loss position.
The decrease in book value per share from $24.28 at December 31, 2021 , to $23.80
at September 30, 2022 , is primarily due to: (i) a decrease of $3.55 per share
due to unrealized losses in our available for sale securities, recorded in
accumulated other comprehensive income and (ii) a decrease of $0.60 per share
attributable to dividends and dividend equivalents. Partially offsetting these
items was an increase of $3.31 per share attributable to our net income for the
nine months ended September 30, 2022 , and an increase of $0.34 attributable to
the net impact of our share repurchases, inclusive of the cost of these
repurchases.
We regularly evaluate opportunities, based on market conditions, to finance our
operations by accessing the capital markets or entering into other types of
financing arrangements with institutional and other lenders. We also regularly
consider various measures to improve our capital and liquidity positions, as
well as to strengthen our balance sheet, improve Radian Group's debt maturity
profile and maintain adequate liquidity for our operations. Among other things,
these measures may include borrowing agreements or arrangements, such as
securities or other master repurchase agreements and revolving credit
facilities. In the past we have repurchased and exchanged, prior to maturity,
some of our outstanding debt, and in the future, we may from time to time seek
to redeem, repurchase or exchange for other securities, or otherwise restructure
or refinance some or all of our outstanding debt prior to maturity in the open
market through other public or private transactions, including pursuant to one
or more tender offers or through any combination of the foregoing, as
circumstances may allow. The timing or amount of any potential transactions will
depend on a number of factors, including market opportunities and our views
regarding our capital and liquidity positions and potential future needs. There
can be no assurance that any such transactions will be completed on favorable
terms, or at all.
Mortgage
The principal demands for liquidity in our Mortgage business currently include:
(i) the payment of claims and potential claim settlement transactions, net of
reinsurance; (ii) expenses (including those allocated from Radian Group ); (iii)
repayments of FHLB advances; (iv) repayments, if any, associated with the
Surplus Note due 2027; and (v) taxes, including potential additional purchases
of U.S. Mortgage Guaranty Tax and Loss Bonds. See Notes 10 and 16 of Notes to
Consolidated Financial Statements in our 2021 Form 10-K for additional
information related to these non-interest bearing instruments. In addition to
the foregoing liquidity demands, other payments have included, and in the future
could include, distributions from Radian Guaranty to Radian Group , including
returns of capital subject to approval by the Pennsylvania Insurance Department ,
as discussed below.
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The principal sources of liquidity in our mortgage insurance business currently
include insurance premiums, net investment income and cash flows from: (i)
investment sales and maturities; (ii) FHLB advances; and (iii) capital
contributions from Radian Group . We believe that the operating cash flows
generated by each of our mortgage insurance subsidiaries will provide these
subsidiaries with a substantial portion of the funds necessary to satisfy their
needs for the foreseeable future.
As of September 30, 2022 , our mortgage insurance subsidiaries maintained claims
paying resources of $5.9 billion on a statutory basis, which consist of
contingency reserves, statutory policyholders' surplus, premiums received but
not yet earned and loss reserves. In addition, our reinsurance programs are
designed to provide additional claims-paying resources during times of economic
stress and elevated losses. See Note 8 of Notes to Unaudited Condensed
Consolidated Financial Statements for additional information.
Radian Guaranty's Risk-to-capital as of September 30, 2022 , was 11.1 to 1.
Radian Guaranty is not expected to need additional capital to satisfy state
insurance regulatory requirements in their current form. At September 30, 2022 ,
Radian Guaranty had statutory policyholders' surplus of $738.6 million . This
balance includes a $526.1 million benefit from U.S. Mortgage Guaranty Tax and
Loss Bonds issued by the U.S. Department of the Treasury , which mortgage
guaranty insurers such as Radian Guaranty may purchase in order to be eligible
for a tax deduction, subject to certain limitations, related to amounts required
to be set aside in statutory contingency reserves. See Note 16 of Notes to
Consolidated Financial Statements and "Item 1A. Risk Factors" in our 2021 Form
10-K for more information.
Radian Guaranty currently is an approved mortgage insurer under the PMIERs.
Private mortgage insurers, including Radian Guaranty, are required to comply
with the PMIERs to remain approved insurers of loans purchased by the GSEs. At
September 30, 2022 , Radian Guaranty's Available Assets under the PMIERs
financial requirements totaled approximately $5.4 billion , resulting in a PMIERs
Cushion of $1.6 billion , or 44%, over its Minimum Required Assets. Those amounts
compare to Available Assets of $5.4 billion and a PMIERs cushion of $2.1
billion , or 62%, at December 31, 2021 .
The primary driver of the decrease in Radian Guaranty's PMIERs Cushion during
the nine months ended September 30, 2022 , was an increase in Minimum Required
Assets due primarily to increased RIF.
Our PMIERs Cushion at September 30, 2022 , also includes a benefit from the
current broad-based application of the Disaster Related Capital Charge that has
reduced the total amount of Minimum Required Assets that Radian Guaranty
otherwise would have been required to hold against pandemic-related defaults by
approximately $180 million and $300 million as of September 30, 2022 , and
December 31, 2021 , respectively, taking into consideration our risk distribution
structures in effect as of that date. The application of the Disaster Related
Capital Charge has reduced Radian Guaranty's PMIERs Minimum Required Assets, but
we expect this impact will diminish over time. See "Item 1.
Business-Regulation-Federal Regulation-GSE Requirements for Mortgage Insurance
Eligibility" in our 2021 Form 10-K for more information about the Disaster
Related Capital Charge.
Even though they hold assets in excess of the minimum statutory capital
thresholds and PMIERs financial requirements, the ability of Radian's mortgage
insurance subsidiaries to pay dividends on their common stock is restricted by
certain provisions of the insurance laws of Pennsylvania , their state of
domicile. Under Pennsylvania's insurance laws, ordinary dividends and other
distributions may only be paid out of an insurer's positive unassigned surplus
unless the Pennsylvania Insurance Department approves the payment of dividends
or other distributions from another source.
In light of Radian Guaranty's negative unassigned surplus related to operating
losses in prior periods and the ongoing need to set aside contingency reserves,
Radian Guaranty is not currently permitted under applicable insurance laws to
pay dividends or other distributions without prior approval from the
Pennsylvania Insurance Department . Under Pennsylvania's insurance laws, an
insurer must obtain the Pennsylvania Insurance Department's approval to pay an
Extraordinary Distribution. Radian Guaranty sought and received such approval to
return capital by paying Extraordinary Distributions to Radian Group , most
recently in February 2022 . Based on the current performance and assuming the
continuation of favorable credit performance in our mortgage insurance business,
we expect that Radian Guaranty could potentially have positive unassigned
surplus by early 2023. See Note 16 of Notes to Consolidated Financial Statements
in our 2021 Form 10-K for additional information on our Extraordinary
Distributions, statutory dividend restrictions and contingency reserve
requirements.
Radian Guaranty and Radian Reinsurance are both members of the FHLB. As members,
they may borrow from the FHLB, subject to certain conditions, which include
requirements to post collateral and to maintain a minimum investment in FHLB
stock. Advances from the FHLB may be used to provide low-cost, supplemental
liquidity for various purposes, including to fund incremental investments.
Radian's current strategy includes using FHLB advances as financing for general
cash management purposes and for purchases of additional investment securities
that have similar durations, for the purpose of generating additional earnings
from our investment securities portfolio with limited incremental risk. As of
September 30, 2022 , there were $153.6 million of FHLB advances outstanding. See
Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements for
additional information.
homegenius
As of
investments totaling
Insurance
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Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Title insurance companies, including Radian Title Insurance , are subject to
comprehensive state regulations, including minimum net worth requirements.
Radian Title Insurance was in compliance with all of its minimum net worth
requirements at September 30, 2022 . In the event the cash flows from operations
of the homegenius segment are not adequate to fund all of its needs, including
the regulatory capital needs of Radian Title Insurance , Radian Group may provide
additional funds to the homegenius segment in the form of an intercompany note
or other capital contribution. Amounts provided to Radian Title Insurance are
subject to the approval of the Ohio Department of Insurance . Additional capital
support may also be required for potential investments in new business
initiatives to support our strategy of growing our businesses.
Liquidity levels may fluctuate depending on the levels and contractual timing of
our invoicing and the payment practices of our homegenius clients, in
combination with the timing of our homegenius segment's payments for employee
compensation and to external vendors. The amount, if any, and timing of the
homegenius segment's dividend paying capacity will depend primarily on the
amount of excess cash flow generated by the segment.
Ratings
Radian Group , Radian Guaranty,Radian Reinsurance and Radian Title Insurance have been assigned the financial strength ratings set forth in the chart below. We believe that ratings often are considered by others in assessing our credit strength and the financial strength of our primary insurance subsidiaries. The following ratings have been independently assigned by third-party statistical rating organizations, are for informational purposes only and are subject to change. See "-The current financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position and potential downgrades by rating agencies to these ratings and the ratings assigned toRadian Group could adversely affect the Company" under "Item 1A. Risk Factors" in our 2021 Form 10-K. Ratings Subsidiary Moody's (1) S&P (2) Fitch (3) Demotech (4) Radian Group Baa3 BB+ BBB- N/A Radian Guaranty A3 BBB+ A- N/A Radian Reinsurance N/A BBB+ N/A N/A Radian Title Insurance N/A N/A N/A A (1)Based on theJuly 21, 2022 , update, Moody's outlook forRadian Group and Radian Guaranty is currently Stable. (2)Based on theMay 21, 2021 , update, S&P's outlook forRadian Group , Radian Guaranty and Radian Reinsurance is currently Stable. (3)Based on theApril 27, 2022 , release, Fitch's outlook forRadian Group and Radian Guaranty is currently Stable. (4)Based on theMarch 15, 2022 , release.
Critical Accounting Estimates
As of the filing date of this report, there were no significant changes in our critical accounting estimates from those discussed in our 2021 Form 10-K. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for accounting pronouncements issued but not yet adopted that may impact the Company's consolidated financial position, earnings, cash flows or disclosures. 65
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Table of Contents
Glossary
BIGLARI HOLDINGS INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
REGIONAL MANAGEMENT CORP. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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